Tuesday, August 30, 2016

The federal government can and should use its power to buy generic medicines at a fraction of their current price, according to Hannah Brennan, Amy Kapczynski, Christine H. Monahan, and Zain Rizvi in their new article, A Prescription for Excessive Drug Pricing: Leveraging Government Patent Use for Health. They note that 28 U.S.C. § 1498 allows the federal government to use patents without license as long as it pays "reasonable and entire compensation for such use." This provision "is regularly used by the government in other sectors, including defense," and was relied on "numerous times to procure cheaper generic drugs in the 1960s," and should "once again be used to increase access to life-saving medicines." The article is chock-full of interesting details and is a recommended read even for those who disagree with their ultimate policy conclusions.

The authors discuss how § 1498 has been used recently to acquire patented inventions ranging from electronic passports to genetically mutated mice, and how the Defense Department used § 1498 to buy generic antibiotics from Italian firms before Italy started issuing patents on drugs. They synthesize the § 1498 caselaw and note that it is not a replication of the patent damages award; e.g., lost profits are strongly disfavored, and the cases show concern with "excessive compensation" to the patent owner. Adjustments to § 1498 royalties have been made based on risks and expenses incurred by the patentee in developing and creating a market for the products, and to account for "reasonable" profits, so the authors advocate awarding pharmaceutical patentees their risk-adjusted R&D costs plus average industry returns (perhaps a 10-30% bounty). This approach to calculating patent royalties is similar in many ways to that advocated by Ted Sichelman for all patent cases, as discussed on this blog in June.

Brennan et al. tie their argument to a concrete case: Gilead's new drugs for treating the Hepatitis C virus, which is "one of the most pressing health problems facing the United States." Gilead's list prices approach $100,000 for a twelve-week regimen, resulting in $36 billion in earnings in the drugs' first 27 months—likely around 40 times the total cost of developing the drugs. At these prices, most patients remain untreated; for example, Medicaid treated only 2.4% of enrollees with Hepatitis C in 2014. The authors roughly estimate that under their method of compensation, the total cost would drop to $860 per course of treatment (with $500 paid to a generic supplier and $360 paid as a royalty to Gilead, which could challenge the royalty in the Court of Federal Claims).

The likely reaction of many readers will be that with these reduced profits, companies like Gilead will lack sufficient incentives to invest in developing new drugs. The authors acknowledge this concern, but they argue that (1) these effects will be small "if the central constraint in R&D is the supply of innovations or if the elasticity of innovation with respect to expected profits is relatively low"; (2) reduced profits might also reduce wasteful "racing" for blockbuster rewards; and (3) even if there is some reduced incentive, the net effect can still be positive if the gains in terms of reduced deadweight loss are sufficiently large.

To be sure, the chance of such a significant change to the current pharmaceutical patent reward structure seems unlikely, but the value of § 1498 for access-to-medicines advocates may be as much in its threat as in its use. For example, the authors note that the only recent use of § 1498 for pharmaceuticals was after the anthrax scare in 2001, when the government's suggestion of importing generic versions of ciprofloxacin under § 1498 drove the patent owner to cut its prices in half. They argue that this "illustrates the power of § 1498 in the pharmaceutical context: It provides the government with the necessary leverage to obtain major price reductions, whether through voluntary agreements or generic procurement." In short, perhaps if Gilead realizes the possibility of such a huge cut to its profits, it will be more willing to negotiate—and more lives will be saved.